December 12, 2024 (MLN): Pakistan’s central bank is set to slash the policy rate for the fifth consecutive time with a probable magnitude of 200bps in the upcoming monetary policy meeting on December 16, 2024, as the focus shifts from curbing inflation to fostering economic growth.

This would bring the total rate cuts to 900bps since June 2024, bringing the policy rate down to 13%—a level last closely seen in June 2022.

Pakistan’s inflation slowed to 4.9% in November compared to the previous year, marking the lowest price increase since April 2018 and falling well within the central bank’s target range of 5-7%.

This took the average inflation in 5MFY25 to 7.88%, a significant decline from 28.62% in 5MFY24.

Non-perishable food prices and transportation costs have dropped compared to last year, which is a direct benefit to the country’s lower-income groups.

The International Monetary Fund (IMF) has also revised down the inflation forecasts for Pakistan, projecting consumer price gains to average 9.5% in FY25 from the earlier projection of 12.7%.

What further paves the way for the anticipated 200bps cut is the current position of real interest rates, which stand at 10.14%—significantly higher than Pakistan’s historic average—providing ample room for the central bank to initiate a rate cut.

Last time, the central bank surprised by delivering an aggressive rate cut of 250bps compared to the median estimate for a 200bps.

This time, despite having ample room, the SBP is expected to adopt a gradual approach, maintaining positive real interest rates and focusing on forward-looking inflation.

Survey Results

To gauge market sentiment, Mettis Global News conducted a survey regarding the upcoming central bank’s monetary policy decision.

Majority (57.1%) of analysts expect the central bank to slash rates by 200bps to 13%.

The next highest number of votes was given to the 250bps cut category, followed by votes for higher magnitude cuts of 300 basis points or more.

Additionally, 8% predict a 150 basis points cut.

Meanwhile, only a few participants also voted for a 50-100bps cut

Macroeconomic indicators supporting towards expected rate cut

Firstly, the foreign exchange reserves held by the central bank have surpassed the $12bn mark, standing at the highest level since March 2022 with a surge of $3.82bn or 46.43% this calendar year.

In 4MFY25, the current account balance which used to flash red in headlines has transitioned to a surplus of $218m compared to the deficit of $1.538bn in SPLY.

This is largely due to robust remittance inflows, with the Pakistani diaspora sending $14.766bn in 5MFY25—an increase of 33.59% year-on-year.

On the fiscal front, Pakistan also recorded the first budget surplus in over two decades during the first quarter of fiscal year 2024-25 thanks to increased revenue and a bumper surplus profit of the State Bank of Pakistan.

This is also helping the government retire its debt. The central government’s debt also experienced its largest decline since September of the previous year and has been on a downward trend for the second consecutive month.

On the back of these improved macroeconomic conditions in the country, the Pakistani Rupee (PKR) is on track to snap its seven-year-long losing streak against the mighty Dollar this calendar year, a magnificent comeback from being titled as one of Asia’s worst-performing currencies last year.

Hence, with such stable economic conditions, the central bank is expected to focus on achieving its GDP growth target of 3.6% for FY25 by easing borrowing costs to industries.

Money Market Yields

Since the last monetary policy meeting, the secondary market has seen a sharp decrease in yields across all tenors.

The 3-month yields have fallen by 138bps, the 6-month by 111bps, and the 12-month by 103bps.

In the primary market, Market Treasury bills (MTBs) yields have also witnessed a fall across all tenors.

Since the November MPC meeting, T-bill yields have fallen to 11.9999% (-170bps) for 3 months, 11.9999% (-150bps) for 6 months, and 12.2999% (-90bps) for 12 months.

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